Servcorp's profit squeezed by weakness in global office markets

Servcorp's profit squeezed by weakness in global office markets

A slump in underlying net profit has highlighted the challenging business environment confronting global serviced offices provider Servcorp (ASX: SRV) in FY21.

The company posted a statutory profit of $22.1 million, up from $6.9 million a year earlier – a result that was impacted in FY20 by $20.9 million in write-offs. However, underlying net profit after tax in the latest financial year was almost 23 per cent lower at $23.6 million.

Servcorp’s FY21 result was hit by weakness in Australia, New Zealand, South-East Asia and Europe, offsetting a solid performance in North Asia.

The company’s US operations stemmed some of the bleeding after Servcorp scaled back operations to just three cities on the east coast and Houston in Texas.

The Sydney-based group reported a 22 per cent slide in group revenue to $275.7 million for the full year. The result was aided by a strengthening of the Australian dollar by year’s end. FY21 mature revenue was 10 per cent lower in constant currency terms, rather than 17 per cent, compared to a year earlier.

“The COVID-19 pandemic continues to make trading conditions difficult across every market in which we operate,” says Servcorp.

“Occupancy levels through 2021 financial year have been relatively stable, (with) mature floor occupancy finishing the year at 73 per cent.”

This compares with 69 per cent in FY20. Servcorp reported all-floor occupancy of 72 per cent across its portfolio, with the company crediting this in part to its investment in coworking spaces.

“Recent growth in the flexible workspace industry has been underpinned by the expansion of coworking spaces,” says the company.

“While the COVID-19 pandemic had a significant impact on coworking initially, our investment pre-COVID in refurbishing reception areas has played a substantial part in our ability to hold serviced office occupancy above 70 per cent.”

Despite a tough FY21, Servcorp is confident that the current year will deliver a rebound in its fortunes.

“While it remains unclear how long the path to a post-COVID world is, we remain optimistic,” it says.

“The rollout of the vaccine across markets in which we operate, as well as impacts of fiscal stimulus, are supporting economic activity, with both business and consumer confidence slowly returning to pre-COVID levels in some markets.

“We have already committed to some growth in FY22 and continue to look for further opportunities for growth in mature markets with proven management performance.”

Providing there is no worsening of conditions during the year, Servcorp is targeting mature NPBIT of between $33 million and $36 million in FY22, as well as underlying free cash of $50 million.

“COVID-19 continues to significantly impact the way we live and work for the foreseeable future,” says the company.

“We still are of the view that when we emerge from COVID-19, we envisage that flexible workspaces will be more important than ever, so we will continue to tailor our offering to serve those ever-evolving trends.”

Servcorp is paying a final dividend of 9c per share, unfranked, taking the annual payout to 18c.

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